December 2013

A Legal Update from Dechert's Financial Services Group

TIC B Forms Are Amended to Explicitly Cover U.S. Investment Managers

In January 2014, U.S. investment managers may experience increased reporting obligations as a result of recent changes to the Treasury International Capital ("TIC”) reporting system effective for certain reports regarding cross-border claims and liabilities and holdings of short-term securities.

Some investment managers previously may have reported their funds’ cross-border claims and liabilities and holdings of short-term securities to the Federal Reserve Bank of New York (“FRBNY”) as part of the U.S. Department of the Treasury’s (“Treasury”) TIC reporting system on TIC Forms CQ-1 and CQ-2 (collectively, the “TIC C Forms”) or simply were not aware that these U.S. government surveys applied to them. Treasury adopted amendments to TIC Forms BC, BL-1, BL-2, BQ-1, BQ-2, and BQ-3 (collectively, the “TIC B Forms”) and the TIC C Forms to more clearly cover asset managers, effective January 2014.

Investment managers have historically reported this data on the TIC C Forms. Due to the amendments, beginning with forms filed after December 31, 2013,1 a newly-defined category of “non-bank financial institutions” (“NBFI”), including U.S. investment managers, will no longer be required to report on the TIC C Forms (if they even were aware of the forms) and instead will report certain cross-border claims and liabilities and short-term securities on the TIC B Forms.2 The TIC B Forms had previously been reserved for banks and other depository institutions, bank holding companies, financial holding companies, and broker-dealers (among other similar types of institutions). This change could subject investment managers to heightened TIC reporting requirements, including more numerous forms and more frequent reporting.3

This OnPoint provides an overview of the TIC B Forms and identifies, when helpful, key distinctions between the TIC B Form and the old TIC C Form regimes.4

Purposes of the Forms

The TIC B Forms and the TIC C Forms are designed to provide Treasury with a snapshot of cross-border claims and liabilities and holdings of short-term securities. That data is used by the U.S. government to generate macroeconomic surveys such as U.S. balance of payments data.

Both sets of forms capture this information on an aggregate basis from the party deemed best suited to provide the report. For example, the instructions to each set of forms provide that assets held by a U.S. custodian should be reported by the U.S. custodian, not the U.S. end investor (e.g., a U.S. fund) on whose behalf the assets are held.

Overview of the TIC B Forms

The TIC B Forms are periodic surveys that collect snapshot month- and quarter-end information about (i) the claims of U.S.-resident financial institutions (e.g., U.S. asset managers) and their U.S.-resident customers on non-U.S. residents, and (ii) the liabilities of U.S.-resident financial institutions (e.g., U.S. asset managers) and their U.S.-resident customers to non-U.S. residents.5 In the asset management context, the term “customers” applies to the investment funds and can also apply to managed accounts. Any assets of a U.S. fund that are not held by a U.S.-resident custodian may thus be subject to reporting by the manager on behalf of its U.S. funds.6 The following table highlights some of the features of the TIC B Forms most relevant to investment managers.

Form (frequency)

Coverage7

Filing Thresholds

Filing Deadline (first 2014 date)

BC(monthly)

Report of U.S. Dollar Claims of Financial Institutions on Foreign Residents

Includes U.S.-resident investment managers’ own U.S. dollar claims on non-U.S. residents

Examples:

a U.S. investment manager’s claims on its non-U.S. funds for accrued management fees

$50 million, or $25 million with respect to any individual country

January 15

BL-1 (monthly)

Report of U.S. Dollar Liabilities of Financial Institutions to Foreign Residents

Includes U.S.-resident investment managers’ own U.S. dollar liabilities to non-U.S. residents

Examples:

fees owed by a U.S.-resident investment manager to a non-U.S. subadviser or service provider

liabilities of a U.S. investment manager to foreign affiliates or subsidiaries

$50 million, or $25 million with respect to any individual country

January 15

BL-2 (monthly)

Report of Customers’ U.S. Dollar Liabilities to Foreign Residents

Includes U.S. dollar liabilities of U.S. funds to non- U.S. residents

Examples:

(if no U.S. custodian reports this data) a U.S. fund’s accrued fees, paid by the fund, and owed to a non-U.S. subadviser or service provider

(if no U.S. custodian reports this data) a U.S. fund’s U.S. dollar-denominated margin debit balance with a non-U.S. bank or broker

$50 million, or $25 million with respect to any individual country

January 15

BQ-1 (quarterly)

Report of Customers’ U.S. Dollar Claims on Foreign Residents

Includes U.S. dollar claims of U.S. funds on non-U.S. residents

Examples:

(if no U.S. custodian reports this data) a U.S. mutual fund’s holdings of commercial paper denominated in U.S. dollars and issued by a non-U.S. issuer

a U.S. fund’s U.S.-dollar credit balance with a non-U.S. bank

$50 million, or $25 million with respect to any individual country

January 20

BQ-2, Part 1 (quarterly)

Report of Foreign Currency Liabilities and Claims of Financial Institutions, and of Their Domestic Customers’ Foreign Currency Claims with Foreign Residents

Includes U.S. investment managers’ foreign currency claims on and liabilities to non-U.S. residents and U.S. funds’ claims on non-U.S. residents

Examples:

a U.S. fund’s foreign-currency denominated credit balance at a non-U.S. bank or broker

a U.S. mutual fund’s holdings of foreign-currency denominated commercial paper issued by a non-U.S. issuer

a U.S. fund’s foreign-currency denominated margin debit balance with a non-U.S. bank or broker

$50 million (no individual country limit)

January 20

BQ-38(quarterly)

Report of Maturities of Selected Liabilities and Claims of Financial Institutions with Foreign Residents

Includes remaining maturities of U.S. investment managers’ claims on and liabilities to non-U.S. residents

Examples:

(if no U.S. custodian reports this data) a U.S. investment manager’s own holdings of short-term securities issued by a non-U.S. issuer

$4 billion (no individual country limit)

January 20

Reportable Data

The definitions of “claims” and “liabilities” differ to some extent among the TIC B Forms depending on whether the applicable form captures information about managed funds or about asset managers themselves.

With respect to U.S. clients managed by a U.S. manager, the types of claims the TIC B Forms capture include:

short-term securities issued by a non-U.S. resident (i.e. negotiable and non-negotiable debt securities with an original maturity of one year or less, as well as short-term U.S. Treasury, federal agency, and federally-sponsored enterprise securities);9

negotiable certificates of deposit of any maturity issued by a non-U.S. resident and held by the reporter for U.S. residents; and

claims of U.S. residents on the reporter’s managed foreign offices.

With respect to the reporter itself (i.e., the investment manager), reportable claims include:

deposit balances of any maturity due from foreign banks (including non-negotiable CDs);

negotiable certificates of deposit of any maturity;

brokerage balances;

customers’ overdrawn accounts;

loans and loan participations of any maturity;

resale agreements and similar financing agreements;

short-term negotiable and non-negotiable securities (original maturity of one year or less); and

money market instruments (e.g., commercial paper, bankers’ acceptances) with an original maturity of one year or less.

short-term securities (i.e., negotiable and non-negotiable debt securities with an original maturity of one year or less, as well as short-term U.S. Treasury, federal agency, and federally-sponsored enterprise securities); and

liabilities of U.S. residents to the reporter’s managed foreign offices.

With respect to the reporter itself (i.e., the investment manager), reportable liabilities include:

non-negotiable deposits of any maturity, including non-negotiable certificates of deposit;

brokerage balances;

overdrawn deposit accounts;

loans of any maturity, excluding drawn syndicated loans where there is a U.S. administrative agent;

short-term non-negotiable securities;

repurchase agreements and similar financing agreements;

insurance technical reserves; and

accrued interest payables.

Items specifically excluded from reporting on the TIC B Forms include, among other things:

long-term securities (i.e., those with an original maturity of more than one year);

assets held as collateral in a cross-border resale agreement;

spot foreign exchange contracts;

derivatives; and

securities lending agreements in which one security is lent in return for another.

Aggregation

While the Instructions to the TIC B Forms do not currently state so explicitly, the FRBNY staff takes the position that investment managers should aggregate their own and their subsidiaries’ reportable data when the investment manager’s own holdings are reported, and should aggregate the holdings of all the funds it manages when the funds’ holdings are to be reported.

Penalties for Failure to File

The TIC B Forms are authorized and required by an Act of Congress. There is potential civil and criminal liability for failure to file timely and accurate reports for any U.S. person or group subject to the reporting requirements. Any group that fails to provide timely and accurate data may be subject to a civil penalty of between $2,500 and $25,000. Any U.S. person or group that willfully fails to submit any of the information required in the report on the TIC B Forms may be subject to a fine of up to $10,000, and, if an individual, may be subject to imprisonment for up to one year, or both. In addition, the requirement subjects to the same penalties officers, directors, employees, and agents of any entity with filing obligations, who knowingly participate in such willful violation.

Importantly, the person who will sign the filing must certify that he/she is aware of the penalties and that he/she is sufficiently knowledgeable about the activities and functions of the group on behalf of whom the report is filed and that he/she can knowingly and with reasonable confidence certify that the information provided is accurate and complete.

Other TIC and Related Reporting Requirements

Certain securities that are excluded from reporting on the TIC B Forms may nevertheless be reportable on other TIC Forms, and asset managers should familiarize themselves with these reporting requirements.10 For example, cross-border derivatives positions, which are expressly excluded from reporting on the TIC B Forms, may be reportable on TIC Form D for firms whose assets under management include derivatives exceeding certain thresholds.11 Similarly, although excluded from reporting on the TIC B Forms, cross-border holdings of, and transactions in, long-term securities are reportable on TIC Form SLT and TIC Form S, respectively. In addition, every five years, Treasury conducts benchmark surveys on TIC Forms SHC and SHL, which collect data on cross-border holdings of both long-term and short-term securities. Finally, the Treasury Foreign Currency Forms require reporting of foreign exchange contracts and positions above a specified threshold.12 To the extent that TIC Forms SHC and SHL capture holdings of short-term securities, there may be reporting overlap between those forms and the TIC B Forms. There may also be overlap between the TIC B Forms, Treasury Foreign Currency Forms and certain Bureau of Economic Analysis Forms.

Special Considerations for Investment Managers Currently Reporting on TIC C Forms

For those investment managers who have filed the TIC C Forms in the past, the following bullet points highlight the key distinctions between the two sets of forms. Going forward, investment managers will no longer report on TIC C Forms.

Form BL-2, which requires investment managers to report cross-border liabilities of the funds under their management, differs in a variety of respects from the corresponding components of Form CQ-1. Form CQ-1 breaks down liabilities to foreign residents into two categories: “Short-Term Negotiable Securities” and “Other Liabilities.” In contrast, Form BL-2 divides the types of reportable liabilities into three categories: “Short-term U.S. Treasury Obligations,” “Negotiable CDs & All Short-Term Negotiable Securities,” and “Other Custody Liabilities.” In addition, the liabilities reported on Form BL-2 are further distinguished based on the category of counterparty or issuer, distinguishing between “Foreign Official Institutions,” “Foreign Banks,” and “All Other Foreigners.”

Form BQ-1 requires reporting of claims under the four separate categories of “Non-Negotiable Foreign Deposits,” “Negotiable CDs,” “All Short-Term Negotiable Securities,” and “Other Claims.” The corresponding items on Form CQ-1 combine “Negotiable CDs” and “All Short Term Negotiable Securities” in a single column.

Also, as noted above, the categories of reportable claims and liabilities under the TIC B Forms are much more detailed than the TIC C Forms, and there are a number of categories that may not be relevant to the investment management business.

In addition, unlike the TIC C Forms, the TIC B Forms distinguish between U.S. dollar-denominated and foreign currency-denominated claims and liabilities. Accordingly, Form BQ-2 deals exclusively with foreign currency-denominated claims and liabilities (of both the asset manager and its funds), while all of the other TIC B Forms capture only U.S. dollar-denominated claims or liabilities.

Footnotes

1. At least one industry group is seeking an extension of the January deadline for investment managers. As of this publication, neither the FRBNY nor Treasury has granted an extension. We will provide an update notification in the event that an extension is granted.

2. Treasury has stated, in connection with the changes to the TIC B Forms, that, “as a consequence of the recent global financial crisis, international reporting standards for collecting and reporting economic and financial data have been enhanced, especially regarding each country’s claims and liabilities.” The change “is designed to improve the coverage of international financial transactions and positions in the U.S. balance of payments and in the U.S. international investment positions, and reflects the change in the international statistical standards to include in portfolio investments most international positions between financial institutions.” 78 F.R. 339 (Jan. 3, 2013).

3. The original proposed effective date provided in the Federal Register for the changes to the TIC B Forms was for all forms filed after June 30, 2013. However, Treasury has provided guidance that the effective date will be for all forms filed after December 31, 2013.

5. The instructions to the TIC B Forms define the term “U.S. resident” as “[a]ny individual, corporation, or other organization located in the United States, including branches, subsidiaries, and affiliates of foreign entities located in the United States. Corporations incorporated in the United States are considered U.S. residents even if they have no physical presence in the United States.” Investment vehicles formed in the United States will usually be “U.S. residents,” as will U.S.-based investment managers.

6. See Instructions for the Treasury International Capital (TIC) Form B Reports, at 32.

7. Substantially all of these reporting requirements were previously covered on Form CQ-1, though in many instances with less frequency and detail.

8. It is unlikely that many investment managers will be required to file Form BQ-3, which would require that the investment manager itself hold at least $4 billion in reportable data, either directly or through a non-U.S. custodian.

9. For purposes of TIC B reporting, short-term securities also include “securities that have been temporarily ‘transferred out’ by foreign residents under repurchase agreements or similar arrangements.” Negotiable debt securities are those which may be traded on a secondary market, while non-negotiable securities are those that are not tradable on a secondary market.

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